Mutual fund: Strategies for retail investors to navigate the stock market volatility

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July 25, 2020 12:05 PM

An optimal approach for equity MF investors to truly benefit from a market crash is to ramp up the SIP amount.

 Mutual fund strategies, investors, equity mf, MAV, nifty 50, index, march market crashSIPs enable the investor to take advantage of the market volatility by balancing the cost of acquisition.

The Nifty 50 is almost back to its pre-COVID levels of January 2020 and all this in a span of just about three months. After having crashed by almost 37 per cent in March 2020, the up-move has been equally sharp for the index. As on July 24, the index was just about 1000 points shy of its January 1 level. But, even though the index has recovered a lot of ground over the last three months, some of the index stocks as well the NAV of some equity mutual fund schemes are down.

It may be too early for investors to consider that the equity asset class is out of the woods, as the corporate earnings may still paint a bleak picture. The global economic scenario including of our own economy has a lot of work to do before coming back to a better shape.

So, should retail equity mutual fund investors be concerned? “The long-term story remains intact and, therefore, retail investors should not take financial decisions based on current temporary disruptions. Disruption of a few months or maybe even a year should not change the entire planning or asset allocation. If it does so, then practically there never was any plan! One should stick to his financial plan and asset allocation, come what may,” says Col Sanjeev Govila (Retd), a SEBI Registered Investment Advisor (RIA), and CEO, Hum Fauji Initiatives, a financial planning firm which caters exclusively to armed forces officers and their families.

Still, the stock market volatility is unnerving for many investors. The average year-till-date (YTD) returns for large-cap, mid-cap, multi-cap and small-cap category is still down by almost 8 per cent.

“Inflow into the equity mutual funds have slumped in June, as investors have pulled out from the large-cap and multi-cap funds. After the third consecutive monthly decline in the Equity MF inflows, investors have been worried about their investments as it is predicted that the equity markets will witness a long waiting period before it starts offering substantial returns,” informs Deepak Khurana, Performance Director for Fund Ratings and Distribution for Asia Pacific region at Refinitiv.

Here are three key strategies that Khurana suggests, equity mutual fund investors can follow:

Stick to your SIPs

As soon as equity markets start descending, mutual fund investors are inclined towards withdrawing their SIPs and this can be one of the key miscalculations. SIP is a great investment tool that allows an investor to invest a static amount of money in a mutual fund house at regular intervals and therefore it balances out the unpredictability of the market. It enables the investor to take advantage of the market volatility by balancing the cost of acquisition.

Increase allocation

An optimal approach for equity mutual fund investors to truly benefit from a volatile market or a market crash is to ramp up the SIP amount when the valuation becomes attractive and reducing the SIP amount when the markets are at a peak. This strategy can be applied using Cyclical Adjusted Price Earnings.

Cyclical adjusted price-earnings

Another strategy that investors can adopt for market valuation is through Cyclical Adjusted Price Earnings, a valuation measure usually applied to the broader market index like NIFTY. This approach helps in assessing the fluctuations in stock values and the future returns from equities over a timescale of 10 years. This ratio can be used to gauge if a stock is undervalued or overvalued by comparing its current market price to its inflation-adjusted historical earnings record.

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